Bernard Hickey: Tax evaders can be artful dodgers

Avoiding or evading tax used to be socially acceptable, or at least not socially unacceptable.

There was a time before the Global Financial Crisis when most people in the moneyed class were perfectly relaxed about discussing how they minimised their tax bills through Loss Attributing Qualified Companies (LAQCs) and family trusts. Dinner party conversation about using trusts and rental property losses to reduce taxable income so as to qualify for Working for Families, student loans and nursing home subsidies used to be perfectly acceptable.

Some are still mystified that anyone would be upset that they deliberately set out to avoid paying tax.

Finance Minister Bill English recounted at a business conference this week how one self-employed voter was angry with him after missing out on an ACC payment because he had structured his affairs to show little taxable income and therefore qualify for Working for Families and the like.

"I told him that's what you get when you don't declare any income, but he was still upset," English said with a shake of his head to an amused audience.

Even Revenue Minister Peter Dunne and Prime Minister John Key appeared sanguine about the issue earlier this month when they said some tax avoidance was legitimate, particularly when it involved the use of shelf companies in New Zealand by wealthy foreigners, while tax evasion was not legitimate.

Public opinion on the legitimacy of avoiding tax is, however, far from sanguine in countries such as Britain, where austerity is cutting benefits and jobs. Tax avoiders and evaders have become public enemy No1.

Starbucks was in the crosshairs in Britain this week after Reuters reported the company had racked up over £3 billion ($5.88 billion) in sales since 1998, but had paid just £8.6 million ($16.8 million) in taxes. Over the last three years it's paid no income tax, despite management telling shareholders its British operation was so successful and profitable it was moving its British CEO to head the American operation.

Starbucks forces its British operation to pay intellectual property fees to its Dutch operation, from where it's unclear the money goes.

Starbucks is not alone among many multinationals who use perfectly legal but morally questionable tactics to shuffle money through tax havens and structures to reduce their overall tax rates. Google, Apple and Facebook are masters at it.

Google, for example, made losses for tax purposes in New Zealand in the last two years, despite advertising industry estimates that last year it made revenues from NZ of more than $100 million. Last year it paid just $109,000 in tax in NZ.

This is a growing problem for most developed economies where tax bases are migrating offshore and into the cloud. Industries which once were immune from international competition, such as media, medical services, education services and accounting services, will increasingly have to compete with foreign firms structured to pay the lowest tax possible in any countries.

British consumers are very grumpy about the dilution of Britain's tax base, particularly given the pressure it is under after years of recession. This week they boycotted Starbucks and various celebrities, including comedian Jimmy Carr, who was forced to apologise to the public after his use of a tax haven was exposed.

Perhaps it's time NZ consumers and taxpayers targeted companies such as Google and Facebook that don't pay their fair share of tax globally.

Bernard Hickey is the publisher of Hive News, a Wellington-based political and economic subscription news email service. He also writes for Interest.co.nz and appears regularly on Radio New Zealand, Radio Live, TVNZ and TV3. He has been a financial journalist for 25 years, having worked for Reuters, the Financial Times Group and Fairfax Media.